Zeti Sees Malaysian Growth With Chance for Ringgit Gain

Malaysia’s central bank Governor
Zeti Akhtar Aziz said the ringgit could gain over time if the
nation’s fundamentals remain strong, and predicted faster
economic expansion in 2014.

Gross domestic product growth may reach the higher end of
the 4.5 percent to 5 percent forecast for this year if exports
recover further, Zeti, 66, said in an Oct. 12 Bloomberg
interview in Washington. She said she expects that economic
expansion next year “would be an improvement from 2013.”

“When you compare our currency with other currencies, it’s
been relatively stable,” Zeti said. “And therefore, we
believe, that over the medium term, yes, it should reflect
underlying fundamentals, and if the underlying fundamentals
remain strong, then over time it should be an appreciating
trend.”

Malaysia, Southeast Asia’s third-largest economy, has
posted average annual growth of 6 percent in the three years
through 2012. As the country now joins Asian emerging markets
from Indonesia to China in facing slower expansion, Zeti said
domestic demand has helped cushion the impact of weakening
exports.

“The domestic sector has been solid and has been the
anchor to drive our growth during this more challenging
period,” Zeti said. In 2013, “global trade slowed down very
significantly, and of course, that affected us because of the
openness of our economy. But had we not rebalanced our economy,
we would have had 1 to 2 percent growth.”

Reduced Estimates

Malaysia in August cut its forecast for 2013 expansion from
a previous prediction of as much as 6 percent. The central bank
held its benchmark interest rate at 3 percent for a 14th
consecutive meeting on Sept. 5 to support economic growth.

Zeti was the first woman to become Malaysia’s central bank
governor, initially in an acting capacity in 1998 when then-Prime Minister Mahathir Mohamad imposed capital controls and
pegged the ringgit during the Asian financial crisis. A ban on
offshore trading in the currency has remained in force, though
the peg was removed in 2005.

“In unstable international financial markets, we would not
venture to internationalize the currency in this kind of
environment,” Zeti said. “We want to have a well-developed
foreign-exchange market, and while this has progressively
improved, it has not reached the stage where we believe that we
should internationalize our market.”

The ringgit has fallen about 4 percent this year and traded
0.2 percent lower at 3.1845 a dollar as of 9:40 a.m. local time
today, according to data compiled by Bloomberg.

Orderly Manner

Bank Negara Malaysia will only intervene to “maintain
important market conditions” and not to defend the currency at
any particular level, Zeti said, adding the currency market has
been operating in an orderly manner even as she expects global
currencies to experience volatility.

Zeti said over the next six months to a year, she is
focused “mostly on growth” rather than inflation (MACPIYOY), because
global expansion will remain “subdued.” Inflation is stable,
she said, as “demand is on a steady growth path and we have
significant expansion of capacity.”

Malaysia’s benchmark interest rate is “appropriate” for
now, she said. Consumer prices rose 1.9 percent in August from a
year earlier.

“With inflation stabilizing, we believe the central bank
will not be changing its policy rate for some time,” said Irene Cheung, a currency strategist in Singapore at Australia & New
Zealand Banking Group Ltd. (ANZ) “The next key thing to watch is the
budget as the rating agencies are saying the fiscal deficit
remains relatively high.”

Delay Projects

After Fitch Ratings cut Malaysia’s credit outlook to
negative in July citing rising debt levels and a lack of
budgetary reform, Prime Minister Najib Razak in September raised
subsidized fuel prices for the first time since 2010 and said he
will delay some public projects. The government has run annual
budget deficits since the Asian financial crisis, with state
spending exceeding revenue every year starting in 1998.

While the government’s subsidy rationalization will
contribute in some part to higher prices, productivity gains can
help lower costs, Zeti said. The government’s financial position
will improve from revenue collection, which has become more
efficient, and the implementation of a value-added tax will also
boost the revenue base, she said.

On the risk of a Fitch rating cut for Malaysia, Zeti said
she was “confident that the commitment by the government will
demonstrate the potential for improvement in the government
financial position, with a number of initiatives that will be
announced in the budget.”

Job Creation

Zeti said the U.S. Federal Reserve slowing the pace of its
$85 billion a month in asset purchases will be positive if it’s
based on strength in the world’s largest economy, and that
better communication by American policy makers will reduce
volatility in financial markets when it happens.

Tapering the bond buying amid an “economic recovery that
is accompanied by job creation” will be “a positive
development for the rest of the world,” Zeti said. “More
precise communication would contribute to the orderly
implementation of this tapering.”

“When this tapering takes place and it’s based on an
economic recovery, then it is very likely that the volatility in
the financial markets will be temporary,” she said. “However,
if the recovery stalls or is disrupted then of course that
volatility will continue and therefore it’s quite important that
the recovery is entrenched prior to the tapering.”

“Continuity is very important at this stage in particular
because it is at a challenging point of having these kinds of
unconventional policies, and she’ll face the challenge of
managing the exit,” Zeti said. “I know her well and I really
welcome her prospective appointment as the chairman of the Fed.
She is very qualified for the position.”